Calculating Financial Values
Complete a series of 10 problems in which you calculate the time value of money, the price of a bond and yield to maturity, and the stock price and required return as well as compare characteristics of stocks and bonds.
Note: The assessments in this course build upon each other, so you are strongly encouraged to complete them in sequence.
Compounding and discounting cash flows might be the most important topic in the study of finance. The practice of discounting cash flows applies to everything from mortgage, auto, and student loan calculations to valuing bond and stock prices and deciding which projects an organization should invest in to create value for its shareholders.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment objectives:
- Competency 1: Apply the theories, models, and practices of finance to the financial management of the firm.
- Calculate time value of money problems, including future value, present value, interest rate, number of periods, and net present value (NPV).
- Calculate the price of a bond and the yield to maturity (YTM).
- Calculate the stock price and required return of a stock.
- Competency 3: Evaluate alternative methods of financing a firm in diverse economic environments.
- Compare four key characteristics of stocks and bonds.
- Competency 1: Apply the theories, models, and practices of finance to the financial management of the firm.
Competency Map
Questions to Consider
To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.
- What is the importance of time value of money concepts, including compounding (future value), discounting (present value), and annuities? Why do organizational leaders need to understand these concepts?
- What type of bond interests you? How is it different from other bonds?
- How are bonds valued? How do interest rates affect the value of bonds? Consider the importance of the yield to maturity (YTM).
Resources
Suggested Resources
The resources provided here are optional. You may use other resources of your choice to prepare for this assessment; however, you will need to ensure that they are appropriate, credible, and valid. They provide helpful information about the topics in this unit. The MBA-FP6016 – Finance and Value Creation Library Guide can help direct your research. The Supplemental Resources and Research Resources, both linked from the left navigation menu in your courseroom, provide additional resources to help support you.
The following resources will provide assistance to complete the assessment.
The following texts are designed to assist learners to master core concepts, solve financial problems, and analyze results.
- Boundless. (n.d.). Boundless finance. Retrieved from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/
- Chapter 5, "Time Value Money".
- Chapter 6, "Bond Valuation"
- Chapter 7, "Stock Valuation".
- Chapter 15, "Dividends".
- Boundless. (n.d.). Boundless finance. Retrieved from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/
Additional Resources for Further Exploration
The following texts are designed to assist learners to master core concepts, solve financial problems, and analyze results.
- Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance: Core principles and applications (4th ed.). New York, NY: McGraw-Hill. - Available from the bookstore
- Chapter 4, "Discounted Cash Flow Valuation," pages 82–128.
- Chapter 5, "Interest Rates and Bond Valuation," pages 129–163.
- Chapter 6, "Stock Valuation," pages 164–194.
- Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance: Core principles and applications (4th ed.). New York, NY: McGraw-Hill. - Available from the bookstore
The text offers an introductory look at corporate finance.
- Welch, I. (2014). Corporate finance (3rd ed.). Retrieved from http://book.ivo-welch.info/ed3/
- Chapter 3, "Stock and Bond Valuation: Annuities and Perpetuities," pages 41-60
- Chapter 5, "Time-Varying Rates of Return and the Yield Curve," pages 85-119
- Chapter 14, "Valuation from Comparables and Financial Ratios," pages 431-480
- Welch, I. (2014). Corporate finance (3rd ed.). Retrieved from http://book.ivo-welch.info/ed3/
- Assessment Instructions
Demonstrate your understanding of financial concepts by completing the following problems. Where appropriate, show or explain your work. It is recommended that you use Excel and its built-in formulas to work on the problems.
Problem 1. Calculate the future value of $3,500, compounded annually for each of the following:
- 10 years at 7 percent.
- 15 years at 9 percent.
- 20 years at 5 percent.
Problem 2. Calculate the present value for each of the following:
Problem 2. Calculating Present Values | |||
Present Value | Years | Interest Rate | Future Value |
| 5 | 4% | $15,250 |
| 8 | 7% | $30,550 |
| 12 | 10% | $850,400 |
| 20 | 15% | $525,125 |
Problem 3. Calculate the interest rate for each of the following:
Problem 3. Calculating Interest Rates | |||
Present Value | Years | Interest Rate | Future Value |
$282 | 2 |
| $325 |
$607 | 6 |
| $891 |
$32,600 | 12 |
| $142,385 |
$57,435 | 22 |
| $463,200 |
Problem 4. Calculate the number of years in each of the following:
Problem 4. Calculating the Number of Periods | |||
Present Value | Years | Interest Rate | Future Value |
$765 |
| 6% | $1,385 |
$845 |
| 9% | $4,752 |
$17,200 |
| 11% | $432,664 |
$23,700 |
| 14% | $182,529 |
Problem 5. Refer to the cash flows listed for the Kelly Company investment projects in the table below. The discount rate is 6 percent. Calculate the present value of these cash flows as well as the present value at 12 percent and at 17 percent.
Problem 5. Present Value and Multiple Cash Flows | |
Year | Cash Flow |
1 | $750 |
2 | $840 |
3 | $1,230 |
4 | $1,470 |
Problem 6. Value the bond Midcorp has issued, with the following characteristics:
- Par: $1,000.
- Time to maturity: 28 years.
- Coupon rate: 7.50 percent.
- Semiannual payments.
Calculate the price of this bond if the yield to maturity (YTM) is each of the following:
- 7.50 percent.
- 9 percent.
- 4 percent.
Problem 7. Calculate the bond yield in the following scenario: Two years ago, Walters Electronics Corporation issued 20-year bonds at a coupon rate of 6.75 percent. The bonds make semiannual payments, and currently sell for 106 percent of par value. Calculate the YTM.
Problem 8. Calculate the stock value in the following scenario: The next dividend payment by RST Incorporated will be $3.45 per share. The dividends are projected to sustain a 6.50 percent growth rate into the future. If RST stock currently sells for $67 per share, what is the required return?
Problem 9. Calculate the stock value in the following scenario: Nickels Corporation will pay a $3.10 per share dividend next year. The company plans to increase its dividend by 4.25 percent per year, indefinitely. How much will you pay for the company's stock today if you require a 12 percent return on your investment?
Problem 10. Provide a three-column table identifying four key characteristics of stocks (equity) and bonds (debt) and comparing them. Briefly discuss why a firm would prefer one over the other as a method of financing.